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Chile election could signal 'radical changes'

Sunday's vote is likely to tilt toward left-leaning candidate Michelle Bachelet, who vows to hikes taxes on business, tackle what she calls income inequality, strengthen labor unions and spend billions on education to satisfy university protesters.

SANTIAGO, Chile — Chile has seen rapid economic growth and rising incomes under the pro-business policies of a conservative president who spurned the class warfare ideologies that have wracked many of its neighbors.

But voters don't seem as if they are in the mood to stick with such policies.

On Sunday, a presidential election is likely to tilt toward Michelle Bachelet, a left-leaning former president whose coalition includes the Communist Party and who vows to hikes taxes on business, tackle what she calls income inequality, strengthen labor unions and spend billions on education to satisfy university protesters.

"These are quite radical changes that send a bad signal," says Francisco Klapp, an economist at the Liberty and Development investigative center in Santiago.

"It would be the wrong path for Chile. The policies would discourage reinvestment," Klapp says.

Polls say Bachelet, 62, is the heavy favorite to take most of the vote in Sunday's election, but she will have to win 50% to avoid a runoff against a former friend on the right, Evelyn Matthei.

Matthei is running on a platform similar to the free-market polices of President Sebastian Pinera, who is forbidden by the constitution from running for a second consecutive four-year term.

Bachelet also came up against her term limit in 2010, but as president she governed largely as a centrist. She rebuffed the socialist polices of her party often and refused to raid the revenues from Chile's cooper industry to raise incomes at the lower levels.

She was caught off-guard by massive protests from high school students complaining of poor quality education, and a new transport system for the Santiago region that failed to work well. However, the economy did not do badly under her, and her approval rating was high when she left office.

Now Bachelet is proposing to ease social tensions by overhauling Chile's maligned education system. And she intends to do it by imposing an idea she once rejected: raiding business revenues.

Bachelet proposes to raise the corporate tax rate from 20% to 25%. And she is also going after a system introduced during the dictatorship of Augusto Pinochet that allows wealthier Chileans to avoid the 40% tax on income over $100,000 a year by putting their earnings in investment companies.

The system has boosted savings and fueled growth, which has helped make Chile the wealthiest nation in Latin America, but has also left the government to rely on the sales tax for most of its revenue, which disproportionately burdens the poor.

Still, a 2011 United Nations report said Chile was the most attractive country for investment in Latin America. And it's a magnet for U.S. investment; U.S. companies invested nearly $35 billion in Chile that year.

"Bachelet needs to be very careful about changing the rules," Klapp says.

A Nov. 7 poll by IPSOS showed that 35% of voters backed Bachelet, well under the 50% she needs to avoid a runoff on Dec. 15. Matthei, the candidate for the governing center-right Alliance coalition, polled at 22%.

Matthei herself has baggage. Her father was commander in chief of the air force under the military regime of Pinochet, and she backed military rule in 1998.

But she has come out hard against Bachelet, warning that she will take Chile down the road of Argentina and other countries where shifts toward socialism have rattled their economies. Bachelet says she wants "absolute public control" over water and mining in Chile, the world's biggest copper producer.

"If Bachelet wins, there could be a turn to the left that is too brusque for a moderate country like Chile," says Joaquín Lavín, Matthei's campaign manager.

"I worry for property rights," says Rodrigo Lavado, 30, a bank executive who will vote for Matthei. "Bachelet's proposals are very populist."

Shop owners are worried as well as corporations.

"Small businesses like mine are going to suffer," says Pamela Fuica, 40, who sells fried food from her street stall in a working-class neighborhood in south Santiago.

But Bachelet says Chile is weighed down by inequalities, calling them an "obstacle" to development. Her campaign slogan, "Everybody's Chile," appears on posters across Santiago and appeals to those who want government policies that favor the masses.

An unmarried mother of three who was tortured for her underground activism in the early years of the dictatorship, Bachelet headed a United Nations organization for women until deciding to run again.

"Bachelet looks, talks and lives like Chile," says Robert Funk, a political scientist at the University of Chile, adding that the current president Pinera, who is a billionaire businessman, does not.

On the other hand, some Chileans, especially young people, view her as too moderate. Although she is now promising reforms, critics say she did little during her presidency to move Chile away from policies they dislike.

"In 2006, there were also promises, but few were fulfilled," says Fredy Ríos, 23, an engineering student who will vote for Marco Enríquez-Ominami, a left-wing candidate. "I don't trust her."

And some say Bachelet is a pragmatist who is unlikely to clash strongly with businessmen and investors.

"Bachelet knows how important Chile's market-friendly reputation is and I expect her to tread carefully," says Michael Henderson, a Latin American analyst at Capital Economics in London.

Large protests in recent years by university students demanding a fairer education system have had major repercussions. Pinera lowered interest rates on student loans to meet their complaints but Bachelet is calling for university to be free for all students within six years.

"Bachelet represents a possibility for change," says Gabriel Ossandón, 23, an outgoing student leader at the University of Chile's law faculty.